Tesla’s Bull Run Stalls: UBS Cuts Rating Over AI Hype and Delayed Innovations

Key Takeaways

• Tesla’s stock price declined by 8.4% on Thursday.
• UBS has downgraded its TSLA rating from neutral to sell.
• News that Tesla’s robotaxi launch will be delayed until October and reports that Model 2 plans may be canceled have undermined investor confidence.

After climbing from $168 dollars per share a month ago, Tesla stock topped out at $265 on Wednesday, July 10, and has pulled back to less than $250 at the time of writing. 

As the car maker’s market rally fizzled out, UBS downgraded  TSLA to a sell rating Friday, signaling declining investor confidence in the stock which has made significant gains off the back of unbridled AI hype.

How Hype Fueled Tesla’s Rally

Although Tesla is currently the most valuable car maker in the world, in 2023 it sold just 1.8 million vehicles. In contrast, the most productive company in the automotive industry, Toyota, sold 11.2 million. So why is Tesla valued at nearly 3 times as much as Toyota?

Sure, Teslas are generally more expensive. They may even have better margins per unit. But these factors alone don’t justify the massive discrepancy between the two firms’ valuations. 

The key metric to consider here is the price-to-earnings ratio (P/E), which measures the ratio of a company’s market value to its annual revenues. Most auto companies have a low P/E of below 20. For example, Toyota’s is 8.98.

However, Tesla has a P/E of 67.27 , a ratio more appropriate for a fast-growing tech startup than a traditional car maker. 

In other words, Tesla’s stock market valuation is based on the expectation that it will continue to grow at something close to the rapid pace that it has throughout the last decade. 

Tesla’s Success Rests on Self-Driving Dominance

The expectation that Tesla will continue to grow rapidly is based on the assumption that it will dominate the emerging market for self-driving vehicles. And so far, no other company has come close to its success in the arena. 

But if one does and Tesla loses its lead in self-driving technology, the assumption underpinning its current market value could come down like a house of cards. To make matters worse, Asian rivals are rapidly closing the gap with Tesla’s battery technology, which once gave it an edge in the electric vehicle market.

A few years ago, investors were happy to treat Tesla like a high-growth technology company and let it focus on research and development. But shareholders are increasingly demanding results. And the company hasn’t always delivered. 

Investors Demand Results

The recent stock market slide was precipitated by the news that Tesla would delay the launch of its robotaxi service from August to October. Coming on top of reports  that the firm had abandoned plans for a new Model 2, the delay triggered an 8.4% decline in the company’s share price on Thursday, TSLA’s biggest single-day price drop this year.

“Concerns about a lack of enticing new models have dogged the business and the original August date for the robotaxi was dangled like a carrot to investors worried over reports that the Model 2 would be canceled,” observed Danni Hewson, the head of financial analysis at AJ Bell.

Tesla’s next earnings call is likely to be “a feisty one,” he told CCN, “as investors push to understand what is deliverable and by when.”